The Market Predicts Violence

Ivan Lo looks at the sideways market, the outlook for gold, and two interesting charts that shows the market predicts violence.

The Market Predicts Violence

Just when you thought it was safe…

This past week, the S&P 500 posted its first back-to-back weekly drop in 2012. European stocks continued to fall for the fourth straight week – the longest streak since last August.

Crude capped its fifth weekly decline since February as China’s economic growth slowed to the least in almost three years.

China is the second largest consumers of oil – second only to the United States.

During this sideways market, investing becomes a chore. You can clean up, but the dust keeps piling up. Regardless of fundamentals, the prices of stocks may not be a direct correlation to the performance of its company. As I watch the news, be it CNBC or Bloomberg, all I hear are these so-called experts telling investors which way the market is going.

If the news is positive, they tell us the market is going up. If the news is negative, they tell us its going down. But the truth is, they have no idea. No one does. The market still hasn’t decided which way it’s going.

One week it’s up. The next week it’s down.

With the political drama that’s about to unfold in the US and the European debt woes continuing to plague the global markets, making short term bets on the market is simply just that – a bet. You’re better off heading to the casino.

Profits in the market are becoming tough and the only reason we still have a market to play is because hedge funds and algo-traders are desperate to make a return. They are churning the market for whatever they can get. Volume continues to be light on all markets and positive retail buying sentiment just isn’t there.

Overall, I am sitting on the sidelines. But that doesn’t mean I am not playing it. My portfolio is shrinking but I am accumulating and looking for bargains on many of the junior to mid-cap precious metal stocks. Many of them are bottoming or have already bottomed, which means a lot of them could easily double before the year is over.

I will once again be looking at purchases in the Market Vectors Junior Gold Miners ETF (GDXJ) – perhaps as early as next week. (I also continue to like silver and expect a breakout and much higher prices within the next few months. iShares Silver Trust ETF (SLV) would be worth looking into.)

One of our featured companies this year is up, while most of its peers are down.

MAG Silver (TSX: MAG) (NYSE: MVG) has become one of the strongest silver performers in N. American markets this year, up over 40% since early January. It’s up more than 23% since our initial coverage back in February.

I am seeing a lot more precious metal juniors bottoming out, but I don’t expect this to last much longer. I don’t see any other sector with a better discount and that means there’s an opportunity to pick up cheap shares. You can bet I’ll be looking for them.

What About Gold Prices?

The S&P 500 had its best Q1 gain since 1998 sending U.S. stocks above gold by the most in more than a decade. The S&P 500 climbed 12 percent, 5.3 percentage points more than gold for the widest gap to start a year since 1999, according to data compiled by Bloomberg. While gold has not performed nearly as well as the S&P this year, that is about to change.

As the stock market moves up, it gives the ultimate illusion that everything is better and people begin to accept that the economy is recovering. While I believe the market will eventually tell the tale, I don’t believe that everything is better. And the market is once again showing us the future, as stocks fell in back-to-back weeks.

With the volatility of the stock market back and a negative sentiment brewing, we should soon see gold move up again – as it did last week.

Those forcing the price of gold down are beginning to lose the battle and we’re seeing the bulls overpower them once again. If this continue, gold could easily bounce back to US$1800 in a short period of time.

My target hasn’t changed. Gold at US$2000/oz is achievable – especially if we get QE3.

Further monetization of debt is inevitable. That means the fiat system will slowly breakdown and real assets such as real estate, gold, silver, diamonds, commodities, and collectibles will be the only true form of wealth preservation.

Those hanging onto too much cash in the long haul will see their purchasing power deplete and much of their wealth destroyed. For now, cash is king as it allows you to profit from undervalued stocks in the precious metals sector. So make your gains now and prepare for a long period of currency consolidation.

Charts that Worry

Early last year, I told investors to look at those who make guns because wealth destruction can lead even the sanest of men to do the wrong things. Desperation has a way of changing us all.

Take a look at these charts from two big gun makers:

Smith and Wesson Holding Corporations 1 Year Chart (NASDAQ: SWHC)

Smith and Wesson Holding Corporations 1 Year Chart (NASDAQ: SWHC)

Sturm, Ruger & Company (NYSE: RGR) 1 Year Chart

Sturm, Ruger & Company (NYSE: RGR) 1 Year Chart

Is the market telling us something? Is the market predicting violence?

The market will eventually tell the tale…

Until next week,

Ivan Lo

Equedia Weekly

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Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies including MAG Silver. We’re biased towards MAG Silver because they are an advertiser and we own shares in MAG Silver which we bought after our report. You can do the math. Our reputation is built upon the companies we feature. That is why we invest in every company we feature in our Equedia Reports, including MAG Silver. It’s your money to invest and we don’t share in your profits or your losses, so please take responsibility for doing your own due diligence. Remember, past performance is not indicative of future performance. Just because many of the companies in our previous Equedia Reports have done well, doesn’t mean they all will.

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